As for Quantitative Easing (QE) and success, well that is an interesting issue. As I mentioned in another article one thing you will not find outlined by many Governments around the world is by what measure they will judge if their economic packages are a success. For example what does Rudd’s $300 billion need to achieve to be judged a success? Has the government clearly outlined a range of KPI’s that the economic stimulus packages will be measured against? No…the best we have is some “forecasts” but no clear definition of what success would look like.

The same goes for QE. How do we actually know if it worked or failed? If the economy does not pick up strongly people can argue it would have been worse without QE and if the economy ticks up even a little then some economists will leap onto this as a sign that QE worked.

If you take the Japanese experience of QE for example the debate still rages between those who say QE failed and those who say QE actually worked. Although some people claim it is quite clear QE failed in Japan I have read plenty that suggests otherwise…the only way we could know for sure would be to go back in time and try to manage the post-bubble Japanese economy by not using QE.

But I have to say that I am unaware of an example where QE has worked without question and was judged to be a complete success. But then again I am not an economist so maybe someone out there does know of such a case?

Prior to the 1930′s when economists got the ear of government and government started to get progressively bigger and want to manage booms and busts by intervening, booms were reliably followed by self cleansing (albeit painful) busts. But since the 1930′s, the results have been much less predictable. Quite possibly because of the interventions.

Thanks for the link to Soros’ paper -- It was one of the most interesting reads I’ve had in relation to the GFC. I’m not sure I agree with your interpretation of it though. Soros seems to be saying that regulators should be trying to keep bubbles “within tolerable bounds” and suggests some 1950′s and 1960′s based ways of doing it. Which do away with the argument re interest rates being a blunt instrument. Though any suggestion it would actually be done, may well be enough to cause the markets to throw a 20% hissy fit. (They are very fond of their bubbles I suspect?) I think it will have to happen though. And I’m certainly picking up vibes it is on world government agendas. I suppose they could forget once an appearance of normality is restored. But if they serious (and for now at least I think they still are), the question would be when to start breaking the bad news to the markets I guess? The markets are certainly still pretty fragile. But Dow 10,000 might be about the right level -- It seems that people can live with Dow 8,000 without feeling the end of the world has come. And it would make the French and the Germans happy. And might even help China feel a bit less narked. Though it could be a nasty shock to Mr Rudd if he is serious about relying on 4.5% growth pa as we go into the next bubble to help balance Oz’s books. But I reckon that is just a bit of politicking -- He can’t really be expecting that sort of growth surely?

Re America: I think they have a huge amount going for them and will be just fine -- Once they learn to live on a lot less than they do now. Or come up with a sneaky way to get some freebies.
There seem to be some indications their economy could be stabilising. Their debt would seem to be a concern. (At least it is to the Chinese.) They do have an ace up their sleeve in that the debt is in USD. But if they take too much advantage of that (either intentionally or by mistake) the USD’s status as global reserve currency will definitely be lost. There are indications it is in the early stages of losing it regardless. Where that could lead is a very interesting question. Just one more reason for America to adopt the approach recommended by Soros I guess. Although I doubt it will prevent the move away from such heavy USD reliance -- Just make it more palatable and orderly.

So in relation to where we are in this mess, I think we are going to see significant changes. They’ll be slow and drawn out. A lot of it will centre around the role of the USD. And on regulation of the financial markets. I think there is too much vested interest for any bubble in US Treasuries to be allowed to bust. It will be slowly deflated. To be honest, I can’t even see one last desperate bubble in stocks as the boomers head towards retirement and throw caution to the winds. Sure, by and large, they’ve only been hurt rather than wiped out. But amongst the ones who’ve got the money, the levels of caution are very high. And I can’t see banks lending a lot to those who don’t have the money to play the markets on margin any time soon. And if governments let it happen, the next bust will be a doozy. Because if there is a next time within 5 or 10 years the governments that got stung this time around simply won’t be able to come running to bail out their banks. They won’t have the money. And they can’t even afford to let inflation really run rampant -- Not if they can avoid it. Borrowing the money this time around is going to be a big enough ask without high inflation having made the currency look too wobbly. Plus they don’t want to be paying the high interest rates that go with that anyway. No, it really has to be a game of let’s see if we can’t get some stability again with maybe just a bit of inflation and then rewrite the rule book re Financials I think?

Soros’ article was great -- It actually allowed me to see just where they might be trying to go with this -- Thanks again. (Just hope I’m not giving them too much credit for having a plan that they don’t -- Smile!)

I made some other points in topic “Rudd Economics 101 -- When in doubt spend like crazy.”

I have zero faith in Gov. to understand and effectively manage the economic issues confronting us at the moment. Exactly as you say, the true capitalism approach is being subsituted for a meddle and manipulate approach.

I wonder what Iceland will be like in 5 years? They crashed and burned very early…almost like an involuntary accelerated version of capitalism. Plus they have cheap power. I see some potential… (obviously not a global powerhouse though haha)

I do feel a little gloomy about the next 12 months or so, but over the longer term I believe markets around the world will start to recover.

I wonder how the U.S. economy will come out of all this? Stronger than before or is it in for years of flat or declining growth?

I’m very much part of the ‘doom and gloom’ crowd. We’re just at the beginning of this mess.

If the various governments of the world had the sense to leave this bad situation alone, eventually the ‘creative destruction’ of true capitalism would get us through it i.e. bad businesses would (rightly) fail, and (in time) good businesses would arise to claim their resources and allocate them more effectively. It would be hard for a while, but we’d get through it.

But every developed country in the world (including Australia) now seems determined to follow the Keynesian / socialist path, spending huge amounts of money and protecting favored corporations and industries, creating market distortions and debt all over the shop. Our leaders seem to have forgotten what little history they knew. The ‘cure’ we’re being adminstered through these ridiculous stimuli, bailouts and whatnot will prove to be worse than the disease.